Oil Majors Leaving South-East Asia – A Red Flag For The Area?

South East Asia is one of the four birthplaces of the modern oil industry. In 1846 Russian engineers Semyenov and Alekseev drilled the first ever oil well in Baku, then part of the Russian Tsarist Empire but today Azerbaijan, which turned Central Asia into the first major producer of crude oil in the world. Some 10 years later, in 1859, Colonel Drake drilled his famous oil well in Pennsylvania which led to the United States becoming the second major oil producing region in the world. Then in 1885 Dutchman Aeilko Jans Zijlker turned South East Asia into the third key oil producer by striking oil with his Telega Tunggal well on Sumatra, Indonesia. (In 1908 the Middle East became the fourth key production area, after William Knox D’Arcy found crude oil in Masjed Soleyman in contemporary Iran.)

Today, however, the oil industry in South East Asia’s is in clear decline. Unlike Central Asia (where a Chevron lead consortium recently announced a $37 billion investment in the Tengiz oil field), and America (where shale technology has pushed oil production back up to record levels), oil production in South East Asia peaked around 2001 at 3.0 mb/d, and currently stands around 2.4 mb/d following substantial declines in production in Indonesia and Malaysia. As the remaining reserves are relatively modest at 13.8 billion barrels, making up just 1% of global reserves, the general expectation is that South East Asia production will further decline to 2.1 mb/d by 2020 and 1.5 mb/d by 2040.

The news that Oil Majors that built up South East Asia’s oil industry are now looking at exiting it, as highlighted in a recent WoodMackenzie report, should therefore not surprise anyone. In the current low oil price environment the Oil Majors are in desperate need for cash and thus looking at divesting “non core” assets. Since they tend to prefer spending whatever money they do have on investment opportunities that increase oil production (greenfield), rather than opportunities that just maintain it (brownfield), their mature assets in South East Asia are an obvious choice for this divestment.

Oil Major Divestment: A Reason For Concern

For policy makers in the region this Oil Major strategy should be a reason for concern. An intent to sell is usually accompanied by a decision to not invest, namely, meaning that oil production in South East Asia could decline even faster than predicted as the investments necessary to limit the natural decline of mature fields will not be made until either the oil price recovers, or the divestment is completed. This would not be a temporary decline, one that is corrected once the oil price recovers to a more sustainable level. Once idled an oil well almost never recovers to previous production levels. Even a temporary lack of investment will thus have a permanent impact on oil production.

It is imperative, therefore, that the current situation is managed well by the countries concerned, as a faster-than-expected oil production decline can quickly become an obstacle to economic growth. The question is, of course, what they could do.

Oil Major Divestment: An Opportunity

To ensure continued investment in South East Asia’s oil production capacity throughout the current low oil price phase, the concerned countries could take a lead from Argentina. To prevent the 2014 crash of the oil price from accelerating the decline in oil production in the country, the Argentinian government decided to pay $3 per barrel to companies that maintain or increase output (as compared to the last quarter of 2014). Similar programs could ensure continued investment in South East Asia’s oil industry, especially if they establish a floor below the price that oil companies receive for their product and thus reduce the downside risk associated with such investments.

Beyond this, government policy should target capture of the business opportunities in the Oil Majors’ divestment intention. Mature, or “late life” oilfield redevelopment can be a profitable undertaking, namely. (See, for example, Apache’s acquisitions in the North Sea.) Surprisingly, the mid-size oil companies that specialize in this niche of the oil industry exited the South East Asia region before the announcement of the Oil Majors’ divestment plan, meaning there is room in the South East Asia market for companies with the unique set of skills, capabilities and experience that can make mature oilfield redevelopment a success.

Since South East Asia’s oil industry has been in decline for quite some time already, there is experience with mature field management in the region. A private-public collaboration could ensure this experience is brought together, pooled as it were, and given the opportunity to manage the mature assets no longer wanted by the Oil Majors. Malaysia seems to have realized this opportunity earlier already. In 2013 Petronas brought together its experience with, and knowledge of, mature oilfield management and redevelopment in a new subsidiary named Vestigo Petroleum. It has since been helping Vestigo get access to small and mature resources, to enable it to apply its capabilities in a profitable manner. Undoubtedly, this will enable Vestigo to develop its capabilities further and optimize its approach.

If managed well, out of this private-public collaboration could come mature field management and redevelopment specialist companies with the ability to (out)compete their peers around the world. As the share of mature fields in global oil production continues to increase, and thus the demand for mature oilfield services grows, this policy could thus lead to a revival of South East Asia’s oil industry: very different from before, but stronger than ever.